Bernanke let it be known that the "current situation is not sustainable" in recent testimony to the House of Representatives. He further reiterated that in a letter to Rep. Marcy Kaptur (D-Ohio). He wrote: "There are a variety of organizational forms that might replace Fannie Mae and Freddie Mac that could likely provide mortgage credit without the systemic risks associated with these institutions in the past." When he testified before the House, he discussed two possible forms emerging for mortgage financing: One would be private, with possibly a government-insured program, and the second would be "more like government utilities" that "provide services under full government control." He didn't go into further detail.
But Congress certainly is letting the administration know that major changes are needed for the $12-trillion U.S. mortgage market. Many Democrats, hearing from affordable housing advocates, want the government to minimize its efforts to encourage homeownership and instead shift priorities toward rental housing for low-income people.
Republicans, who just a few years ago supported President George W. Bush's "ownership society," have introduced legislation to get rid of Fannie and Freddie completely. One thing both sides can agree on is that, whatever happens to Fannie and Freddie, it must take taxpayers off the hook on future mortgage-funding schemes.
So far taxpayers have bailed out Fannie and Freddie with $160 billion and the losses continue to mount. Folks that work for Fannie and Freddie are banned from political activity, so they won't have much to say in the new design, other than to pass their ideas on to their liaison with the Treasury Department.
So far, comments received include support for several similar entities that are heavily regulated with guarantees for investors. The federal government would stand behind those guarantees.
To me, that doesn't sound much different than what we had with Fannie and Freddie. But the one difference in this design is that mortgage originators would charge a fee for that guarantee (sounds a lot like Federal Housing Administration loans) and use at least some of that money to cover the cost of bad loans. The insurance fund would also be used if one of the mortgage entities fails.
I guess this is where the "government utilities" scenario Ben Bernanke spoke about comes in. These mortgage entities would be heavily regulated, like government utilities, but their main purpose in life would be to support the mortgage market. At least we wouldn't have entities sold on the stock market whose main purpose in life was to enrich the executives and the shareholders -- as Fannie and Freddie did -- with little regard for the taxpayers who ended up footing the bill for their excesses.
Right now the mortgage market can't survive without government intervention. Most mortgage loans are being made by Fannie, Freddie or the FHA. The private market in mortgages is pretty much on its deathbed with little signs of life. Unless the private market revives between now and January, the government's only choice will be to continue some sort of government support for the mortgage market or the housing industry will be suffering even more than it is now.
Lita Epstein has written more than 25 books, including "Reading Financial Reports for Dummies" and "The 250 Questions Everyone Should Ask About Buying Foreclosures."
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